How Strong Buyers Spur Upstream Innovation

We challenge the view that the presence of powerful buyers stiffles suppliers' incentives to innovate. Following Katz (1987), we model buyer power as buyers' ability to substitute away from a given supplier and isolate several effects that support the opposite view, namely that the presence of powerful buyers induces a supplier to invest more in cost reduction. In contrast to negotiations with smaller buyers, the outcome of negotiations with large buyers is fully determined by their more valuable alternative supply option. This increases the supplier.s incentives to reduce marginal costs, both as the supplier receives a larger fraction of the thereby generated incremental profits and as this makes buyers' alternative supply option less valuable. The latter effect is due to downstream competition between buyers and, as we show, is also stronger the larger and thus the more powerful buyers are.Buyer power; Merger; Investment incentives

Mergers in Imperfectly Segmented Markets

We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.Imperfect Market Segmentation, Oligopoly, Price Discrimination, Consumer Arbitrage, Mergers

Market Structure, Bargaining, and Technology Choice

The first part of this paper analyzes the impact of horizontal mergers of suppliers or retailers on their respective bargaining power. In contrast to previous approaches, we suppose that parties resolve the bargaining problem efficiently. Moreover, by ensuring that demand is independent at all retailers we exclude monopolization effects. We find that downstream mergers are more likely (less likely) if suppliers have increasing (decreasing) unit costs, while upstream mergers are more likely (less likely) if goods are substitutes (complements). In both cases a merger enables the involved parties to gain access to inframarginal rents. In the second part of the paper we explore how the role of bargaining power affects technology choice under different market structures. We isolate two effects. First, if retailers are non-integrated, suppliers focus disproportionately more on inframarginal cost reduction. Second, this bias is mitigated if goods are substitutes and suppliers are non-integrated as competition exerts a disciplining force. ZUSAMMENFASSUNG - (Horizontale Unternehmenszusammenschlüsse, Verhandlungen und die Wahl der Produktionstechnologie) Der erste Teil des Aufsatzes zeigt, wie sich horizontale Zusammenschlüsse zwischen Produzenten und Einzelhändlern auf die Verhandlungsmacht der Vertragsparteien auswirken. Im Gegensatz zu vorhergehenden Ansätzen nehmen wir an, daß die Parteien ihre Verhandlungsprobleme effizient lösen. Des weiteren unterstellen wir, daß die Einzelhändler Märkte bedienen, die unabhängig voneinander sind, wodurch Monopolisierungsvorteile ausgeschlossen werden. Unsere Ergebnisse zeigen, daß Einzelhändler einen Zusammenschluß favorisieren, wenn die Stückkosten der Produzenten mit zunehmender Ausbringungsmenge ansteigen. Umgekehrt sind die gemeinsamen Gewinne unabhängiger Einzelhändler höher als bei einem Zusammenschluß, wenn die Stückkosten der Produzenten fallend verlaufen. Die Produzenten können ihre gemeinsamen Gewinne durch eine Fusion steigern, wenn ihre Erzeugnisse substituierbar sind. Stehen die Güter der Produzenten in einem komplementären Verhältnis zueinander, so ist ein Zusammenschluß nicht vorteilhaft. Diese Ergebnisse sind unabhängig von der Struktur der anderen Marktseite. Allgemein gilt sowohl für die Produzenten als auch für die Einzelhändler, daß ein Zusammenschluß den Zugriff auf inframarginale Renten der anderen Marktseite ermöglicht. Im zweiten Teil der Arbeit untersuchen wir, wie die Berücksichtigung von Verhandlungsmacht die Technologiewahl eines Produzenten bei unterschiedlichen Marktstrukturen beeinflußt. Wir können zwei Effekte isolieren. (1) Produzenten haben einen Anreiz Kosteneinsparungen bei inframarginalen Ausbringungsmengen zu Lasten von höheren Gesamtkosten zu tauschen, wenn die Einzelhändler nicht zusammengeschlossen sind. (2) Diese Verzerrung hin zu einer ineffizienten Technologiewahl wird abgemildert, wenn die Güter substituierbar sind und die Produzenten unabhängig agieren, weil Konkurrenz eine disziplinierende Funktion ausübt.Merger; Bargaining Power; Technology Choice

Bertrand competition in markets with network effects and switching costs

We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents' discount factors. --Network Effects,Switching Costs,Bertrand Competition

Unionisation Structures and Innovation Incentives

This paper examines how different unionisation structures affect firms' innovation incentives and industry employment. We distinguish three modes of unionisation with increasing degree of centralisation: (1) "Decentralisation" where wages are determined independently at the firm-level, (2) "coordination" where one industry union sets individual wages for all firms, and (3) "centralisation" where an industry union sets a uniform wage rate for all firms. While firms' investment incentives are largest under "centralisation" investment incentives are non-monotone in the degree of centralisation: "Decentralisation" carries higher investment incentives than "coordination". Labour market policy can spur innovation by decentralising unionisation structures or through non-discrimination rules.

Unionization Structures and Firms' Incentives for Productivity Enhancing Investments

This paper examines how unionization structures that differ in the degree of wage centralization affect firms' incentives to increase labor productivity. We distinguish three modes of unionization with increasing degree of centralization: (1) "Decentralization" where wages are determined independently at the firm-level, (2) "coordination" where an industry union sets individual wages for all firms at the firmlevel, and (3) "centralization" where a uniform wage rate is set for the entire industry. We show that firms' investment incentives are largest under complete centralization. However, investment incentives are non-monotone in the degree of centralization so that "decentralization" carries higher investment incentives than "coordination." Depending on the innovation outcome, workers' wage bill is maximized under "centralization" if firms' productivity differences remain small. Otherwise, workers prefer an intermediate degree of centralization, which holds innovative activity down at its lowest level. Labor market policy can spur innovation by either decentralizing unionization structures or by imposing non-discrimination rules on monopoly unions. ZUSAMMENFASSUNG - (Gewerkschaftssysteme und die Anreize der Unternehmen zur Produktivitätssteigerung) Diese Arbeit untersucht den Einfluß unterschiedlicher Gewerkschaftssysteme auf die Anreize von Unternehmen, ihre Arbeitsproduktivität zu erhöhen. Wir unterscheiden zwischen drei Gewerkschaftsstrukturen mit zunehmendem Zentralisierungsgrad: 1.) "Dezentrale Lohnsetzung", bei der Löhne ohne zentrale Koordination auf Unternehmensebene bestimmt werden, 2.) "koordinierte Lohnsetzung", bei der eine Industriegewerkschaft die Lohnforderungen gegenüber einzelnen Arbeitgebern koordiniert und 3.) "zentralisierte Lohnsetzung", bei der ein einheitlicher Lohnsatz für die gesamte Industrie bestimmt wird. Wir zeigen, daß die Investitionsanreize der Unternehmen bei "zentralisierter Lohnsetzung" am stärksten sind. Die Investitionsanreize sind allerdings nicht monoton im Zentralisierungsgrad: "Dezentralisierte Lohnsetzung" führt zu stärkeren Investitionsanreizen als "koordinierte Lohnsetzung". Die Lohnsumme ist in einem zentralisierten Gewerkschaftssystem maximal, solange die Innovationen hinreichend "klein" sind, so daß die Unterschiede in der Produktivität zwischen den Unternehmen gering bleiben. Bei "großen" Innovationen bevorzugen Arbeitnehmer hingegen eine "koordinierte Lohnsetzung", wodurch die Innovationstätigkeit der Unternehmen auf ihr niedrigstes Niveau gedrückt wird. Arbeitsmarktpolitik kann die Innovationsanreize entweder durch eine Dezentralisierung der Lohnsetzung oder durch Diskriminierungsverbote für Monopolgewerkschaften erhöhen.Unions, Oligopoly, Innovation, Productivity, Wage-Setting Centralization, Labor Market Flexibility

Raising Rivals' Fixed (Labor) Costs: The Deutsche Post Case

We analyze the bargaining problem of an incumbent firm and a union when the wage contract becomes generally binding. Our main application relates to competition among operators of mail delivery networks. We describe the Deutsche Post case which highlights the raising rivals' costs incentive and its consequences resulting from labor laws that make collective agreements generally binding. We show that minimum wages implemented by means of extension regulation are an effective deterrence instrument which frustrates both market entry as well as investments into the build-up of a mail delivery network.Minimum wages, postal services, collective bargaining, raising rivals' costs

The Incentives for Takeover in Oligopoly

We present a model of takeover where the target optimally sets its reserve price. Under relatively standard symmetry restrictions, we obtain a unique equilibrium. The probability of takeover is only a function of the number of .rms and of the insiders. share of total industry gains due to the increase in concentration. Our main application is to the linear Cournot and Bertrand models. A takeover is more likely under Bertrand competition if goods are substitutes and more likely under Cournot competition if goods are complements.Takeover bidding; Merger incentives; Oligopoly

Unionisation Structures and Firms' Incentives for Productivity Enhancing Investments

This paper examines how unionisation structures that differ in the degree of wage centralisation affect firms' incentives to increase labour productivity. We distinguish three modes of unionisation with increasing degree of centralisation. (1) "Decentralisation" where wages are determined independently at the firm-level, (2) "coordination" where an industry union sets individual wages for all firms at the firm-level, and (3) "centralisation" where a uniform wage rate is set for the entire industry. We show that firms' investment incentives are largest under complete centralisation. However, investment incentives are non-monotone in the degree of centralisation so that "decentralization" carries higher investment incentives than "coordination." Depending on the innovation outcome, workers' wage bill is maximised under centralisation" if firms' productivity differences remain small. Otherwise, workers prefer an intermediate degree of centralisation, which holds innovative activity down at its lowest level. Labour market policy can spur innovation by either decentralising unionisation structures or by imposing non-discrimination rules on monopoly unions.unionised oligopoly, innovation, productivity, labour market institutions

Bertrand Competition in Markets with Network Effects and Switching Costs

We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.Network effects, switching costs, Bertrand competition, market dynamics